Deck 5: Reporting and Analyzing Inventories

Question 1

In a period of rising prices, FIFO usually gives a lower taxable income, which leads to an advantage when it comes to paying income tax.

Answer 1

False

Question 2

Goods in transit are automatically included in a company's inventory account.

Answer 2

False

Question 3

The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate record for each separate product.

Answer 3

True

Question 4

LIFO is the preferred inventory costing method when costs are rising and managers have incentives to report higher income for reasons such as bonus plans, job security, and reputation.

Question 5

A company can change its inventory costing method without mentioning this change in its financial statements since it is a decision made by internal management.

Question 6

Few companies take a physical count of inventory each year as they rely primarily on inventory records alone to determine the inventory value.

Question 7

Net realizable value for damaged or obsolete goods is equal to the sales price plus the cost of making the sale.

Question 8

The matching principle is used by some companies to justify allocating incidental inventory costs to cost of goods sold.

Question 9

An advantage of the weighted average inventory method is that it tends to smooth out erratic changes in costs.

Question 10

The cost of an inventory item includes the costs of expenditures, directly or indirectly, necessary to bring an item to a salable condition and location.

Question 11

The consistency concept prescribes that a company use the same accounting methods period after period, so that financial statements are comparable across periods.

Question 12

When taking a physical count of inventory, the use of prenumbered inventory tickets assists in the control process.

Question 13

Incidental costs added to the costs of inventory can include import tariffs, freight, storage, and insurance.

Question 14

If damaged and obsolete goods cannot be sold, they are not included in inventory.

Question 15

Goods on consignment are goods passed by their owner, called the consignee, to another party called the consignor that holds the goods for sale on behalf of the owner.

Question 16

If obsolete or damaged goods can be sold, they will be included in inventory at their net realizable value.

Question 17

All incidental costs of inventory acquisition must be assigned to the inventory account.

Question 18

LIFO inventory value is often less than the inventory's replacement cost because LIFO inventory is valued using the oldest purchase cost.

Question 19

If the seller ships goods FOB destination, then ownership of inventory passes when the goods are received by the buyer.

Question 20

Whether prices are rising or falling, FIFO always will yield the highest gross profit and net income.

Question 21

Managers are still able to make important decisions when there are erroneous inventory balances because inventory errors are self-correcting and, as a result, are less serious.

Question 22

The days' sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.

Question 23

The four methods of inventory valuation are SIFO, FIFO, LIFO, and average cost.

Question 24

One of the most important decisions in accounting for inventory is determining the per unit costs assigned to inventory items.

Question 25

According to IRS requirements, companies are allowed to use FIFO for financial reporting and LIFO for tax reporting.

Question 26

An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.

Question 27

An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.

Question 28

It can be expected that companies that sell perishable goods have higher inventory turnover than companies that sell nonperishable goods.

Question 29

GAAP allows the use of LIFO to assign costs to inventory but IFRS does not.

Question 30

An advantage of LIFO is that it assigns the most recent costs to cost of goods sold and does a better job of matching current costs with revenues on the income statement.

Question 31

A company's ability to pay its short-term obligations depends on many factors including how quickly it is able to sell its merchandise inventory.

Question 32

An inventory error is sometimes said to be self-correcting because it causes an offsetting error in the next period.

Question 33

An understatement of the ending inventory balance will understate cost of goods sold and overstate net income.

Question 34

Toys "R" Us had cost of goods sold of $8,321 million and ending inventory of $2,027 million. Based on this, its days' sales in inventory is equal to 89 days.
(2,027/8,321) × 365 = 89 days

Question 35

A company's cost of goods sold was $15,500 and its average merchandise inventory was $4,500. Its inventory turnover equals 3.4.
15,500/4,500 = 3.4

Question 36

Neither GAAP nor IFRS allow inventory to be adjusted upward beyond the original cost.

Question 37

The inventory turnover ratio is computed by dividing average inventory by cost of goods sold.

Question 38

Inventory errors cause misstatements on the current period's records and financial statements but do not affect future periods.

Question 39

There is no simple rule for inventory turnover, except that a high ratio is preferable provided inventory is adequate to meet demand.

Question 40

The full disclosure principle prescribes that the notes to the financial statements report a change in accounting method for inventory costing.

Question 41

In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost of the same inventory items in the usual manner.

Question 42

When units are purchased at different costs over time, it is simple to determine the cost per unit assigned to inventory.

Question 43

The assignment of costs to cost of goods sold and ending inventory using specific identification is the same for both the perpetual and periodic systems.

Question 44

When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs from the most recent purchases.

Question 45

The assignment of costs to the cost of goods sold and to inventory under FIFO is the same for both the perpetual and periodic inventory systems.

Question 46

The conservatism constraint prescribes that the most optimistic amount is used when more than one estimate of the amount to be received or paid in the future exists and these estimates are about equally likely.

Question 47

The lower of cost or market rule for inventory valuation must be applied to only individual items of inventory, not to major categories of inventory or to the entire inventory.

Question 48

LIFO assumes that inventory costs flow in the order they were incurred.

Question 49

The assignment of costs to cost of goods sold and inventory using weighted average yields the same results depending on whether a perpetual or periodic system is used.

Question 50

A company has inventory with a market value of $217,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to $217,000.

Question 51

The cost of goods purchased will differ under the four inventory valuation methods of specific identification, FIFO, LIFO, and weighted average.

Question 52

The matching principle requires that the inventory valuation method used match the physical flow of inventory.

Question 53

A company's cost of inventory was $317,500. Due to phenomenal demand for this product, the market value of its inventory increased to $323,000. According to the consistency principle, this company should write up the value of its inventory.

Question 54

The FIFO inventory method assumes that costs for the most recently purchased items are the first to be charged to the cost of goods sold.

Question 55

Under LIFO, the most recent costs are assigned to ending inventory.

Question 56

The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

Question 57

Monthly or quarterly statements are called interim statements because they are prepared for periods of less than one year.

Question 58

In applying the lower of cost or market method to inventory valuation, market is defined as the current selling price.

Question 59

The choice of an inventory valuation method can have a major impact on gross profit and cost of sales.

Question 60

Three key variables determine the dollar value of inventory: (1) inventory quantity, (2) costs of inventory, and (3) cost flow assumption.

Question 61

To avoid the time-consuming process of taking an inventory each year, the majority of companies use the gross profit method to estimate ending inventory.

Question 62

The inventory valuation method that results in the lowest taxable income in a period of rising costs is:

A)LIFO method
B)FIFO method
C)Weighted average cost method
D)Specific identification method
E)Gross profit method

Question 63

Using the retail inventory method, if the cost to retail ratio is 60% and ending inventory at retail is $45,000, then estimated ending inventory at cost is $27,000.
45,000 × .6 = 27,000

Question 64

An error in the period-end inventory causes an offsetting error in the next period and therefore:

A)Managers can ignore the error.
B)It is sometimes said to be self-correcting.
C)It affects only income statement accounts.
D)If affects only balance sheet accounts.
E)Is immaterial for managerial decision making.

Question 65

The reasoning behind the retail inventory method is that if an accurate estimate of the cost-to-retail ratio is made, ending inventory at retail can be multiplied by the ratio to estimate ending inventory at cost.

Question 66

Merchandise inventory includes:

A)All goods a company owns and holds for sale.
B)All goods in transit.
C)All goods on consignment.
D)Only damaged goods.
E)Only items that are on the shelf.

Question 67

In the retail inventory method of inventory valuation, the retail amount of inventory refers to the dollar amount measured using selling prices of inventory items.

Question 68

The full disclosure principle:

A)Is also called the consistency principle.
B)Prescribes that companies use the same accounting method for inventory valuation period after period.
C)Is not subject to the materiality principle.
D)Is only applied to retailers.
E)Prescribes that the notes to the financial statements report when a change in inventory valuation method is made, its justification and its effect on net income.

Question 69

The consistency concept:

A)Prescribes that a company use the same accounting method period after period except when a change of method will improve financial reporting.
B)Requires a company to use a single method of inventory valuation for all categories of inventory.
C)Requires that all companies in the same industry use the same method of inventory valuation.
D)Is also called the full disclosure concept.
E)Is also called the matching concept.

Question 70

Physical inventory counts:

A)Are not necessary under the perpetual system.
B)Are necessary to determine differences between actual inventory available and the Inventory account balance.
C)Must be taken at least once a month.
D)Require the use of hand-held portable computers.
E)Are not necessary under the cost-to benefit constraint.

Question 71

Goods on consignment:

A)Are goods shipped by the owner to the consignee who sells the goods for the owner.
B)Are reported in the consignee's books as inventory.
C)Are goods shipped to the consignor who sells the goods for the owner.
D)Are not reported in the consignor's inventory since they do not have possession of the inventory.
E)Are always paid for by the consignee when they take possession of the goods.

Question 72

During a period of steadily rising costs, the inventory valuation method that yields the lowest reported net income is:

A)Specific identification method
B)Average cost method
C)Weighted average method
D)FIFO method
E)LIFO method

Question 73

Given the following items and costs as of the balance sheet date, determine the value of Light Company's merchandise inventory.

A)$7,000
B)$7,800
C)$9,800
D)$9,000
E)$6,800

Question 74

The reliability of the gross profit method depends on an accurate and stable estimate of the gross profit ratio.

Question 75

Goods in transit are included in a purchaser's inventory:

A)At any time during transit.
B)When the purchaser is responsible for paying freight charges.
C)When the supplier is responsible for freight charges.
D)If the goods are shipped FOB destination.
E)After the halfway point between the buyer and seller.

Question 76

Given the following items and costs as of the balance sheet date, determine the value of Faltron Company's merchandise inventory.

A)$10,000
B)$6,500
C)$5,500
D)$5,000
E)$4,500

Question 77

Which inventory valuation method assigns a value to the inventory on the balance sheet that approximates current cost and also mimics the actual flow of goods for most businesses?

A)FIFO
B)Weighted average
C)LIFO
D)Specific identification
E)First in still here

Question 78

Upon taking a physical count of its inventory, Damber Corp. determines that $5,500 of goods have become damaged due to a water leak in the warehouse. It is decided that $2,300 of the goods are not sellable and the remainder can be sold at a reduced price of $2,750. The cost incurred to sell the goods will be $800. The damaged goods should be included in inventory at a value of:

A)$3,200
B)$3,550
C)$5,050
D)$1,950
E)$450

Question 79

Damaged and obsolete goods:

A)Are never included in inventory.
B)Are included in inventory at their full cost.
C)Are included in inventory at their net realizable value.
D)Should be disposed of immediately.
E)Are assigned a value of zero.

Question 80

The inventory valuation method that tends to smooth out erratic changes in costs is:

A)FIFO
B)Weighted average
C)LIFO
D)Specific identification
E)WIFO